Finance: Research, Policy and Anecdotes

From Ms. May-be to: yes, we may!

Theresa May has spoken and made a first clear statement about Brexit this week.  Looking backward, her reluctance to speak out can be interpreted in a positive way - she might have been testing the waters and gauging the opportunities that the UK government would get in its negotiations with the EU.  While EU leaders refused any pre-negotiations, the UK government could gain a clear feeling for the steep hill they were facing in the coming months during the actual negotiations from the pre-negotiation public statements of different government officials and politicians across Europe. It has become clear that Single Market membership cannot be reconciled with migration controls and avoiding oversight by the European Court of Justice. The approach favoured by her  (Single Market membership no, but possible Custom Union membership or a similar tailor-made arrangement) thus makes sense from the British view, though it might still be far away from the ultimate outcome. The new approach suggests a slow moving away from the “having the cake and eating it” approach, though she still seems to claim a part of the cake while eating all of it.

 

Theresa May had to cater in her speech to two different audiences – a domestic one and a foreign one.  And she obviously spoke not only as prime minister of a divided country, but as the leader of an equally if not more divided party.   The mix of conciliatory tone towards Europe and the strong statements on sovereignty thus made perfect sense. The reactions on both sides of the channels have shown that she has achieved this only partly – great joy on the British side of the channel among Brexiters, less so on the Continental side, though relief that there seems to be finally a plan in place.  (On a minor note,  As German I am used to British politicians and journalist using WW II against German politicians and football teams even more than 70 years after the end of this wat, but against the French president?!?) 

 

However well received Ms. May’s speech was, words come cheap, ultimately it will be all in the actions and the ultimate outcome.  Her speech was obviously closely followed across European capitals, easy to do so given the status of English as lingua franca.  It seems that the British side, on the other hand, faces a clear shortcoming by not speaking the languages of the other party on the negotiation table, which reduces their capacity to understand the details of European politics and policy making. Simon Kuper had recently a very interesting article in the FT Magazine on this disadvantage for the UK (as for the US) of English being the lingua franca. 

 

One striking statement (and in line with earlier statement by the Chancellor of the Exchequer) was the threat to walk away from Europe and the European socio-economic model if negotiation do not yield what the UK government would consider a good deal. Would that really imply a move towards low-tax, low-regulation, cheap labour economy attracting away investment and jobs from the Continent? The Brexit vote is often seen as a vote against the globalized “neo-liberal” capitalism.  The Prime Minister seems to “understand” that, with a focus more on a more inclusive economy, even if at the expense of growth.   It seems doubtful a new economic model along the lines described above would match this narrative. Ultimately, the Brexit vote was not a vote in favour of Thatcher 2.0!! So, it seems to be a rather empty threat!

 

The decision to leave the Single Market obviously leads a lot of companies now to reassess their investment choices. Of particular concern here in London is obviously the financial sector.  A very interesting recent paper by Tobias Berg, Anthony Saunders, Larissa Schaefer and Sascha Steffen has assessed first effects of the Brexit vote on syndicated lending.  The authors show in very preliminary analysis that issuances in the UK syndicated loan market dropped by 25% after the Brexit referendum relative to a set of comparable syndicated loan markets.  Quite a big effect.  It remains interesting to see how this develops further in the next two years in the run-up to the actual Brexit (or maybe transition agreement?)